Profitability of Contrarian Strategies: Evidence from the Istanbul Stock Exchange

Abstract

This study examines the momentum and contrarian effects on stock returns in one of the leading emerging markets, which has a unique market structure, with record-high inflation, high volatility, high turnover, low correlation of returns with other exchanges and myopic investors: the Istanbul Stock Exchange (ISE). It also investigates the weak-form efficiency of the stock market by examining the profitability of a number of contrarian strategies based on past returns, size, price, book-to-market and earnings-to-price ratios of stocks in various lengths of formation and holding periods. Our findings show that a self-financing trading strategy, buying past loser stocks and selling past winner stocks generate significant abnormal returns (approximately 15% annually) in ISE. However, these large contrarian profits are for bearing the extra risk of loser stocks similar to the US results. We also find significant price, size, and B/M effects in stock returns. Finally, our results show the continuous profitability of contrarian strategies both in very short (starting from 1 month) and in long holding periods (up to 36 months), which appears to be related to country-specific factors.